I’ve posted Entry # 87 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called The Fair-Value P/E10 Number Is Somewhere Between 14 and 16.
Juicy Excerpt: Yale Economics Professor Robert Shiller, the grandfather of the Valuation-Informed Indexing model, puts it at 16. There’s a good case that can be made for that number. But “16” is not the only reasonable answer to the question “What is the fair-value P/E10 number?”
John Walter Russell, former owner of the www.Early-Retirement-Planning-Insights.com site, did the statistical work for development of The Stock-Return Predictor and the other calculators available at my web site. John put the fair-value P/E10 number at 14. He explained why in this article: Typical Values of P/E10.
Evidence Based Investing says
John put the fair-value P/E10 number at 14
No he didn’t. He simply reported that the average value historically was about 14. He made no claims that this was a “fair-value”
Rob says
Good point, Evidence.
The fair-value P/E10 number is really 44, the P/E10 number that applied in January 2000 and that produces a most likely 10-year annualized return of a negative 1 percent real. That P/E10 value caused millions of middle-class investors to suffer such devastating losses that they are now afraid to spend on goods and services and have put our entire free-market economic system into a crisis state.
What could be more fair?
Rob
what says
I guess ‘fair’ and ‘honest’ would be to say:
Rob Bennett puts the PE10 fair value at 14.
kimber says
“The fair-value P/E10 number is really 44, the P/E10 number that applied in January 2000 and that produces a most likely 10-year annualized return of a negative 1 percent real.”
Just a simple question. If that value applied in Jan 2000, then shouldn’t you KNOW what the 10-year annualized return was? Was it, in fact, -1%?
Rob says
Rob Bennett puts the PE10 fair value at 14.
That’s close but not precisely correct, What.
Shiller puts it at 16. Russell preferred 14. I go with 15.
Sometimes I cite the Russell number and sometimes I cite the Russell number.
Lately, I make more of an effort to be consistent and use 15 as “my” number. But I certainly think that “16” is a reasonable take and “14” is a reasonable take.
This is a matter of great importance. In an ideal world, we all would be talking about this a lot more than we do. There’s no need for everyone to agree. But it is important that everyone be familiar with all the arguments and that everyone give the matter a significant amount of thought before investing any money in stocks.
A high percentage of today’s investors have never given the question much thought. That’s scary. Those people are investing blindly. To not know the fair-value P/E10 number is like going to buy a used car without first checking the fair price at Edmunds.com. Not at all a good idea.
Rob
kahr9 says
Kimber:
I think I can answer that. The annualized dividend + interest, corrected for inflation, during that period for the S&P500 was 4%.
That’s a big difference from the “most likely” value of negative 1%.
Mr Bennett, why do you use your theoretically predicted value (which is wrong) when we know what the actual value was?
Rob says
Just a simple question. If that value applied in Jan 2000, then shouldn’t you KNOW what the 10-year annualized return was? Was it, in fact, -1%?
The negative 1 percent real number is the most likely 10-year annualized return for a purchase of a broad index fund purchased at a P/E10 value of 44.
I don’t know what the actual return turned out to be. I believe it was in that general neighborhood. But there is certainly no guaranty that that will always or even often be the case.
For 10-year predictions, there is a range of about 12 percentage points. So, when the most likely return is a negative 1 percent real, it is possible that we will see a return as good as 5 percent real or as bad as a negative 7 percent real. The extreme possibilities are of course far less likely. For example, there was only a 1 in 20 chance that we would see a positive 5 percent real.
What turns up depends on the return sequence, which cannot be known in advance. The return sequence is determined by investor emotion, not economic realities. So it cannot be effectively predicted. This is why short-term timing doesn’t work.
Rob
Rob says
The annualized dividend + interest, corrected for inflation, during that period for the S&P500 was 4%.
That sounds high to me, Kimber. I would need to see a good source for that number before I could trust it as being accurate. Other readers here need to know that you are a long-time Goon poster. So you have a longstanding practice of posting dishonestly on wide range of topics.
That said, I have not checked the number. So I cannot say with certainty that you are being dishonest in this particular case.
Rob
Rob says
Mr Bennett, why do you use your theoretically predicted value (which is wrong) when we know what the actual value was?
This is a very good question, kahr9. It goes to the key distinction between Buy-and-Hold and Valuation-Informed Indexing.
The predicted value is FAR more important than the actual value.
The actual value is the result of a temporary price determined by investor emotion. It possesses no lasting significance. Knowing this number tells you virtually zero about the true value of your portfolio. Portfolios were priced at three times fair value in 2000. So a portfolio with a nominal value of $900,000 had a real, lasting value of $300,000. Not a small difference.
The predicted value is the value that the investment will hold if stocks perform somewhat as they always have in the past. Bogle says that Reversion to the Mean is “an Iron Law” of stock investing. So that’s the value you want to identify.
Let’s say that the numbers quoted above are accurate and that the actual return for those 10 years was a good bit above the predicted return. Is that good news for stock investors? NOT AT ALL.
All that means is that stock investors will be suffering bigger losses in the following years. Not exactly good news.
The best return from an investor’s perspective is the return that brings stock prices to fair-value levels. We are far above fair value levels today. So we know that returns were a good bit higher during those 10 years than what rational investors hoped they would be.
The predicted price is the rational price. That’s the price that rational investors want to be keeping in mind. The temporary prices that Buy-and-Holders get all excited about are short-term fantasy prices. Bogle says that we should all aim to tune out the short-term noise. I strongly believe that is on the mark re that one.
Rob
kahr9 says
My source for the earnings data was simply Shiller’s on-line data. Anybody can go there, download the data, and do the simple calculation.
If you don’t trust me, why don’t you run the numbers yourself. That seems more productive that saying what the number ‘theoretically’ should have been, then disparaging the person who supplies the results of a simple mathematical calculation.
Why don’t you check it out for yourself and report back? It won’t be much work or take much time.
Rob says
If you don’t trust me, why don’t you run the numbers yourself. That seems more productive that saying what the number ‘theoretically’ should have been, then disparaging the person who supplies the results of a simple mathematical calculation.
This particular number DOES NOT MAtter, kahr9.
You are calling the number that does matter “theoretical” and then suggesting significance for this other number. You wouldn’t say such things if you understood what the nominal stock market number signifies.
It is the product of temporary emotional inputs, Kahr9. Do you want to put your retirement money at risk based on a number that is the product of temporary emotional inputs, essentially fantasy thinking? I sure don’t. I do not look up that number because I do not care to know it. It does not tell us anything important about how to invest.
The number that matters is the number that tells us the REAL VALUE of the index.
To get that number, you must apply a valuations adjustment to the nominal number. Without that adjustment, you are living in a fantasy world.
Say that you asked me the score of a baseball game and I told you the score at the end of three innings. Would that tell you what you want to know?
It would not. You want to know who won the darn game. The team that was ahead at the end of three innings often loses at the end of nine innings. You need to know the score at the end of NINE innings.
To invest effectively, you need to know the nominal number of the index ADJUSTED by the P/E10 level to produce the real value of the index.
Do you see, kahr9?
This is the entire story right here.
The Buy-and-Holders place their confidence in the nominal number. The Valuation-Informed Indexers place their confidence in the valuation-adjusted number. Both cannot be right. These two numbers are often markedly different numbers.
Which one do you think is right?
Why?
Are you sure?
If you are not sure, what could you do to become more confident?
These are the questions you need to be asking yourself, in my view.
Please take care.
Rob
kimber says
So, in other words, you are incapable to calculating the number and thus checking on Kahr?
You put up many words, but the result is the same – you apparently cannot do the simple calculation.
Rob says
You’ve found me out, Kimber.
Please don’t tell.
Rob
what says
So, for Rob the imaginary number is more important than the real number. Do you use the imaginary number as input to your return predictor going forward?
With the amount of blabber that Rob pumps out the fact that he can’t figure out the return for the past 10 years is embarrassing. And this type of ‘work’ appears to be what he does.
I wonder what the next 10 years will be like on his long sad journey of failure. I expect that his ‘return predictor’ is going to become completely outdated and unusable because he doesn’t know how to put new data into it and he continues to quote yr 2000 data in 2020.
Rob says
Where do you get this idea that the real number is imaginary, What?
If I ask you to subtract 5 from 9, is the answer “9”?
That’s what you are saying. You are saying that the number before the act of subtraction is real and the number that is the result of the subtraction is imaginary.
If the nominal S&P value is x, and stocks are priced at three times x, the REAL, LASTING S&P value is 1/3x.
Is there any question about that whatsoever?
You (and a good number of others) are angry with me because I speak this obvious truth out loud. It undermines all the financial planning you have done presuming the validity of Get RIch Quick strategies.
Is that my fault?
If you want to be angry with someone, be angry with the people who told you that you don’t need to adjust for valuations. It’s the Buy-and-Holders who do that.
The number that counts is the real number, not the imaginary one.
The nominal number is an imaginary number. It is the product of a collective fantasy that we have been having that this is going to be the first time in history when a Buy-and-Hold strategy works out for long-term investors. It cannot be. It’s a logical impossibility. There’s a fellow who did a standard deviation analysis to determine how likely it is that that fantasy is going to come true. The answer is that the odds are 740 to 1 against the possibility.
Buy-and-Hold is a fantasy, What.
People who care about their money and what it can do to enrich their lives use the REAL (valuation-adjusted) numbers.
I wish you the best in all your future endeavors regardless of what investing strategies you elect to pursue. Please take good care.
Rob
kimber says
‘The nominal number is an imaginary number. ‘
Doesn’t get any better than this.
Rob says
There were people who tried to warn many of the Madoff investors that they were making a mistake. The Madoff investors laughed at them.
Please take good care, Kimber.
Rob
what says
For me the real number is what I can take out of my portfolio and spend immediately.
What is the real number for you Rob? The answer is, you have no idea. For example, if the U.S. is subject to widespread nuclear attack do you think your ‘real’ number is still going to be real?
Rob says
For me the real number is what I can take out of my portfolio and spend immediately.
That makes a lot of sense, Drip Guy.
if the U.S. is subject to widespread nuclear attack do you think your ‘real’ number is still going to be real?
That’s a good point, Drip Guy.
Rob
Drip Guy says
Rob, one presumes you have the ability to read IPs of messages sent to your OWN blog, correct?
It’s quite rudimentary, really.
So, I suggest you inspect the IP’s used for my messages versus those you falsely claim are from me.
HINT/Protip: I never post here under any other moniker than my own.
None.
Never.
100% Truth.
signed,
Drip Guy
Rob says
I believe you, What.
Rob
what says
Drip Guy – I don’t know why you let hocus bother you. He is starting to bore me so I will stop prodding at the depth of his nuttiness soon.
Rob says
What?
Rob
Drip Guy says
Don’t leave on my account, What. Goodness knows that Rob gets little enough traffic on the Plop, so anyone leaving is a significant decrease. He is so desperate to get *some* sort of traffic here that he even lets people he ostensibly hates, who he claims are evil-doers, come over here and leave messages sometimes, at least when his automatic reflex to delete everything doesn’t get the better of him.
Rob, the fact you think I am ‘what’ is amusing and quite instructive. It’s right in line with my personal assessment that your delusions and manias seem to be fully driving the bus now, and your higher brain functions (such has they ever were!) are atrophying noticeably by the day. Good luck with that Rob!
Rob says
he even lets people he ostensibly hates, who he claims are evil-doers, come over here and leave messages sometimes,
What I hate is the Get Rich Quick impulse that you have given such power over you, Drip Guy.
I am confident that, when you overcome the power of the Get Rich Quick impulse, you will become capable of making positive contributions (as you today make positive contributions on subjects to which the GRQ impulse does not reach).
There’s a part of you that joins me in hating the GRQ impulse. If there weren’t, you wouldn’t fight so hard. If you were integrated in your belief in Buy-and-Hold, you could laugh off those who hold contrary viewpoints.
It’s not really me that you hate, Drip Guy. It’s something within you that you hate. You direct the hate at me because I hold up a mirror and force you to look at something you very, very, very much do not want to look at. But, you see, it is Drip Guy who is causing the real trouble for Drip Guy!
What a predicament!
Rob
Rob says
the fact you think I am ‘what’ is amusing
Who?
Rob
Drip Guy says
“It’s not really me that you hate, Drip Guy. It’s something within you that you hate.”
Been buying up a lot more of that $240 dollar gold lately Rob?
Now THAT’S the book you oughta write, and that people would actually buy!
Rob says
I don’t agree, Drip Guy.
I am of course happy that my gold purchases have gone well. But, if stocks continue to perform in the future anything at all as they always have in the past, my gains from gold will end up being a tiny percentage of the gains I will experience from buying stocks. Stocks are where the real action is for middle-class investors, in my assessment.
Those who ARE looking for a case for gold might want to take a look at the book that had the biggest influence on me re that one — Harry Browne’s Permanent Portfolio book (I don’t recall the title). It may be out of print. But often you can find copies of out-of-print books today by doing internet searches. Sometimes used-book stores have copies of them. It’s a fine book.
You take care, you gold bug, you!
Rob
Drip Guy says
Rob,
Don’t sell yourself short! Please do tell your curious readers — How did you manage to buy $10,000 of gold @ $240/oz?
I’m sure a lot of people would be interested.
Rob says
I told the story over at Goon Central.
If you want to provide a link, please do so.
Rob
Drip Guy says
I’d be happy to provide the link Rob, but you never stated when or how you made such a steal.
I was hoping you would be willing to do so here, in the safe, warm and inviting “Free-n-Open” posting environment of your very own site.
Please, enlighten us. It seems right on topic for a finance site, no?
Rob says
you never stated when or how you made such a steal.
There was no “steal.” When you envision the investing project as a process of seeking out “steals,” it’s a sign that you are on the wrong track, Drip Guy.
You’re comparing the two prices and saying “oh, what a steal!” How about the fact that that was dead money for a good number of years? What if I were looking to move to a bigger house and couldn’t afford it because I had money tied up in this dead asset class? Time is money. There’s a cost involved in having money tied up in a non-productive asset class for that long.
If stocks had been reasonably priced at the time, I believe that stocks would have been the better choice. It would not surprise me that, if you did the math, it would show that. Even if it didn’t, I see benefits to being in stocks over gold that do not show up in the math. So it is only in cases where the return potential for gold is far higher that I would look at it. This was one of those cases.
Instead of asking why gold has performed so well, you should be asking why stocks have performed so poorly. There are powerful practical implications that follow from knowing the answer to that one. The gold thing is a sideshow. You are focused on an issue of relatively slight significance.
Rob
Drip Guy says
Rob, let me be even more plain, since your mental faculties are seriously misfiring:
“The ONLY way you got gold for $240/oz, as you claim, was if it was stolen. What date did you supposedly buy your $10,000 in gold, and in what form did you take delivery? In other words, since we know you cannot answer accurately, you are a liar.”
Rob says
You are a 100 percent rational investor, Drip Guy.
I have read many comments by you and have never been able to detect any emotion in any of them.
This is the biggest long-term benefit provided to those who follow a Buy-and-Hold strategy, in my assessment.
Rob
Drip Guy says
Whether I emotionally cold as a stone, or hot as a firecracker, it does not change the plain, cold, proven facts Rob —
You are a big fat liar.
You did not buy $10,000 worth of gold @ $240/ounce.
You lied in print, and repeated it, and did not take the opportunity to correct the record when challenged on it, and instead you merely doubled down on the original lie.
Your credibility (such as it ever was) is shot to h*ll.
Rob says
You are a big fat liar.
The academic research supports Buy-and-Hold.
There was a time when I didn’t see it that way. But I am now able to acknowledge my mistake.
Rob